The Rationale Behind China’s Loan Cuts to Africa

In the Triennial Forum of China-Africa Cooperation held in Senegal in November 2021, President Xi of China had indicated that he would reduce investment by a third to $40 billion on infrastructure projects and instead focus on green projects and private investment flows. The reduction in investment is likely due to the increasing inability of many nations to repay the debt. Countries such as Zambia and Cameroon who have borrowed more than $5 billion each, are listed by the IMF as having a high risk of debt distress. 

The Belt and Road Initiative (BRI) started in 2013 is an ambitious project by President Xi to connect China with other continents both on land and sea, similar to the historic Silk Road. Since then, using Chinese financial institutions such as the China Development Bank and China Exim Bank, China has loaned more than $750 billion for overseas projects between 2000 and 2017 according to AidData. During this period, China has surpassed the United States and become the largest international development financier. China has begun to fund infrastructure projects in key strategic positions, such as a port in Djibouti, where 10% of the total world trade passes by its strait. They have also invested in sectors such as energy, where they have funded projects such as construction dams. However, despite all of the new infrastructure, African nations are struggling to repay the loans.

Orthodox economic theories suggest that improving infrastructure increases productivity within the area, and hence, leads to economic growth. One of these nations is struggling with repaying debts is that many of these mega infrastructure projects do not align with the needs of the people. An example would be the Addis Ababa-Djibouti Railway, which was mostly funded by the Exim Bank at a cost of around $3 billion. It was built to transport extracted resources and cheap manufactured goods created in Ethiopia to the port in Djibouti, where they would be shipped to China. Although businesses can benefit from the improved transportation between the two countries, there are allegations that similar infrastructure projects have done little to help nations diversify away from resource-dependent industries. Hence, nations are left with a lot of debt and infrastructure that mainly benefits China.

Another reason why nations struggle to repay their debt is due to the lack of locally sourced procurement. For capital and labour, China has been reliant on self-sourcing rather than using locally available resources. Although the figures vary by region in Sub-Saharan Africa, only 47% of the procurement by value is locally sourced, according to a 2017 McKinsey & Company report. This creates fewer linkages with the local economy, with less consumption of local resources. In terms of labour, the construction of large infrastructure projects is often outsourced to other Chinese firms, with limited skilled positions offered to locals. This may be problematic in the long run as there will be no meaningful spillover of knowledge occurring, leaving the local construction workers unemployed after the completion of the project. The fewer procurements that are locally sourced, the fewer economic activities are stimulated as there is no long-term meaningful interaction with the local economy, compared to state-funded projects. This makes it difficult to repay debts as the project itself brings limited benefits for the local community. 

With the Covid-19 pandemic forcing governments to spend heavily, their ability to repay their mounting debt to China is falling every day. With the end of the pandemic not insight in a continent with limited vaccination, it will take economies time to recover and repay, for which China may not have the patience. Additionally, with anti-Chinese sentiment rising in response to the accumulating debts that countries owe and fears by China that countries may not be able to fully repay the loans, the progress made by President Xi in Africa is likely to be halted. However, it is yet to be seen fully how the Covid-19 pandemic will have an impact on the BRI.   

Analyst: Nami Kumagai

Sector Head: Edward Raftery

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